Are you struggling to get a mortgage?
If so, a 95% mortgage might be for you.
Below is a clear overview of the 95% mortgage, including: what it is, its pros and cons, and considerations before taking one out.
What is a 95% mortgage?
A 95% mortgage is when you borrow 95% of the value of a house. This means that you will pay 5% of the property’s value up-front as a deposit.
You can only consider the option of a 95% mortgage on properties up to the value of £600,000.
It is a common misconception that 95% mortgages are only available to first time buyers. However, any homebuyer is able to get one.
Why were 95% mortgages introduced?
The idea of a 95% mortgage was first introduced to help first-time buyers onto the property ladder.
Of course, this type of mortgage is not only available to first-time buyers, but they are the most common demographic who struggle to raise a big enough deposit for a property.
What do I need to get a 95% mortgage?
The affordability checks of a 95% mortgage are the same as for any other type of mortgage.
You will need to demonstrate that you have:
- A healthy credit score
- A reliable income
- A salary under four times less than the amount you are borrowing.
There are other things the lender will check, too.
Pros of a 95% mortgage
There are a couple of advantages to a 95% mortgage which make it an attractive option.
Short-term affordability
Firstly, the deposit on a 95% mortgage is much more affordable in the short-term – especially for first time buyers.
Useful for renters
It can also provide an affordable way for renters (particularly those in cities, who struggle to save up due to high living costs) to purchase their first property.
Useful for seizing market opportunities quickly
A 95% mortgage is also considered more attractive when property prices are increasing rapidly.
This is because, in this circumstance, it is considered important to buy a house as soon as possible, rather than wait for a larger deposit, as the house prices might have risen further by the time you get a sizeable deposit.
Cons of a 95% mortgage
A 95% mortgage in the UK comes with several long-term financial drawbacks.
Interest
Firstly, the amount that you are borrowing is higher, which means that the amount you will have to pay in interest will also be higher.
Therefore, while it seems that you are getting the house for cheaper in the short-term, it catches up with you further down the line.
Negative equity
There is also a larger risk of negative equity with a 95% mortgage. If property prices go down, it is possible that this could happen, and you will start to owe more on the mortgage than the property is worth.
Remortgage issues
Thirdly, opting for a 95% mortgage means that you may find it challenging to remortgage. This is because it could take a considerable period for you to reduce your loan to value (LTV) to get the more competitive remortgage rates.
Things to consider before taking on a 95% mortgage
While the idea of only paying a 5% deposit on a property seems more financially attractive in the short-term, it is important to think through your options before making a decision.
Affordability checks
For example, normal affordability checks are still in place when you apply for a 95% mortgage. This means that you can only apply for a loan which is four times the income of your household.
Therefore, for you to afford a 95% mortgage on your own, your salary will still have to be considerably higher than the national average (albeit depending on the price of your property) – especially for first-time buyers.
Lender limits
Furthermore, some lenders only let you borrow up to a maximum of £250,000 on a 95% mortgage, so this is worth keeping in mind, too.
There are other support schemes available in the UK for potential homebuyers, such as Help to Buy or Shared Ownership. You could carry out thorough research into these alternative options before jumping into a 95% mortgage.
Long-term cost
You should also consider how expensive a 95% mortgage is in the long-term.
If it is possible for you to delay moving house for a while longer, until you can gather more funds to afford a larger deposit, then it is almost certainly worth doing so.
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